The benchmark S&P 500 had its worst day in a week as the sell-off put the market deeper into the red for August. The selling was widespread, with technology companies and banks accounting for a big share of the decline.
Investors sought safety in U.S. government bonds, sending their yields tumbling.
The price for gold, another traditional safe-haven asset, closed higher.
The costly trade war between the U.S. and China has rattled markets this month.
An escalation in tensions between the world's largest economies has stoked worries that the long-running trade conflict will undercut an already slowing global economy.
The latest wave of anxious selling left the S&P 500 index down 35.95 points, or 1.2%, at 2,882.70. The Dow fell 391 points, or 1.5%, to 25,896.44. The average was briefly down 462 points.
The Nasdaq composite dropped 95.73, or 1.2%, to 7,863.41. The Russell 2000 index of smaller company stocks lost 18.58 points, or 1.2%, to 1,494.46.
"Trade and the concern that as this escalates it continues to wear on confidence to a point that this actually causes a recession, that's what people are wrestling with," said Ben Phillips, chief investment officer at EventShares.
The major indexes are down more than 3% for August. Even after this month's stumble, they are up solidly this year, led by the Nasdaq with a gain of 18.5%. The S&P 500 is up nearly 15%, though it's down 4.7% from its all-time high set at the end of July.
Anxiety and fear over the U.S.-China trade war continues to hover over the market and has taken stocks on a wild ride in August.
The S&P 500 index zoomed up and down last week, ending with its second straight weekly loss. The wild swings follow President Donald Trump's threat to impose more tariffs on Chinese goods, followed by China's move to allow its currency to weaken.